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Until recently, most banks were paying a little over 1% interest on savings. These days, if you're not getting at least 4%, you're just not paying attention.

By Carolyn Bigda, MONEY Magazine

March 23, 2006: 10:04 AM EST

NEW YORK (MONEY Magazine) -
There's some money you just don't want to take a chance with at all. Maybe it's your rainy-day fund or your kid's college tuition for fall or just a piece of your portfolio that you want on the sidelines for a few months.

In any case, you probably don't expect this stash to earn much of a return. That's what you give up if you're not willing to take any risk.

Lists the nation's highest money-market and CD yields (ignore the averages on the home page, which are slightly inflated by the site's advertisers' rates). To check a bank's financial condition, use their Safe & Sound tool.
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Those high yields aren't hard to find, but they won't come looking for you. Your bank is perfectly content to let your savings gather dust in a non-interest-bearing checking account. Your broker won't advise you that there are better yields than what it pays on its "sweep" accounts.

For the first time in years, it's worth shopping your savings around: A jump from the 1.25 percent or so that large banks offer on money-market accounts to 4 percent or more means you can better than triple your return -- risk-free.

You'll find lists of the top-yielding offerings by clicking here. But it's crucial to choose the category that best suits your needs. Here are the four best options, depending on your situation.

If you're just starting to save

Best choice: Online savings accounts

Most banks still reserve the highest yields for customers who sock away five-figure sums, often charging fees if the balance dips too low. But if you're starting with little or nothing, you don't have to settle for anemic rates. Online savings accounts pay up to 4.25 percent on any balance.

Online banks are able to keep rates relatively high by limiting the ease (and speed) with which you can draw on your funds: There's no check writing or ATM access. To access your cash, you transfer it online or by phone to a brick-and-mortar checking account, which can take up to four business days.

That can be inconvenient, but if you're trying to build savings, it's not necessarily bad to have limited access to your cash. Think of it as enforced savings discipline.

And there are no fees to undermine your efforts. If you're uncomfortable sending hard-earned dough to an entity that exists only in cyberspace, know that up to $100,000 will be protected by the FDIC ,as long as you see the FDIC logo on the site. You can also get a feel for a bank's reputation using Bankrate.com's Safe and Sound tool.

But if those factors don't ease your concerns, two of the top-yielding accounts are available at net banks with brick-and-mortar parents: ING Direct, a subsidiary of Dutch bank ING, offers an introductory rate of 4.75 percent until April 15, when the rate reverts to a still strong 3.8 percent. Emigrant Direct, the online arm of New York's Emigrant Savings Bank, pays 4.25 percent.

You can even set up accounts at more than one online bank and, with a few clicks, move your money to the one paying the highest rate at any given moment; there's usually no charge for transfers, so it won't cost you a thing.

If you have lots of idle cash

Best choice: Money-market funds

Some 30 percent of households surveyed online by Forrester Research have $10,000 or more in a liquid account earning next to nothing.

If you're in that boat, consider putting some of the money in a money-market fund. You can set one up with as little as $1,000 and earn up to 4.5 percent. You can even write checks against your money, though generally they have to be for at least $250.

And while taxable money-market funds currently match the yields of online savings accounts, money funds are likely to win out if the Fed continues to hike its target rate, which the funds closely track. (As the Fed funds rate rose from 2.25 percent to 4.5 percent in the past year, for example, the average fund's return more than doubled, from 1.77 percent to 4 percent.)

With tax-free money-market funds, yield is determined by municipal bond supply and demand. As a result, tax-free yields don't climb as steadily as their taxable counterparts when the Fed hikes rates.

Still, if you are in the 28 percent income tax bracket or higher, you can probably get a better deal with tax-frees.

To decide, multiply the best taxable yield by one minus your tax rate. The result is the yield a tax-free fund needs to beat to make it the better choice.

One caveat: If you're subject to the alternative minimum tax, consider muni funds that are AMT-free. Interest on muni bonds that fund private projects like stadiums is taxable under the AMT. Though they usually have high minimums, AMT-free funds avoid these types of bonds, preserving your full tax exemption.

Money funds are not FDIC-insured. But no individual investor has ever lost money in one. If you insist on FDIC insurance, or don't want to move your cash to a fund company, there are bank money-market accounts online that yield at least 4 percent, even on low balances.

HSBCdirect.com is offering a promotional 4.8 percent rate through April 30; after that, rates revert to about 4.25 percent, and you get that rate at $1. In contrast, most money-market accounts pay lower rates on smaller balances and may even charge fees or suspend interest if your balance drops below a certain level.

While HSBCdirect.com offers ATM access, check writing is not available. For that, consider another money-market account listed in the savings table here.

If you need your cash at a specific time

Best choice: Certificates of deposit

If you have a particular goal for your cash -- say you're buying a home in a year or sending your kid to college in the fall -- consider a CD.

In exchange for locking up your cash for a set term, CDs guarantee a yield that's usually higher than money fund rates. While the top-paying money fund currently yields 4.58 percent, you can easily find six-month CDs at 4.6 percent or more.

The key is to stay short. Right now the best five-year CD yields as little as 0.34 percentage points more than the best six-month CDs. And penalties for cashing out before maturity are steep (usually three to six months' interest). So there's little reason to tie up your cash for more than six months.

Also, skip gimmicks like bump-up CDs, which allow you to "bump up" to a higher yield once during the CD's term. For that perk, you give up a quarter point or so at the outset -- an unnecessary sacrifice with a short-term CD.

If your low-risk savings are devoted to long-term goals

Best choice: Short-term bond funds

Risk-free savings isn't just for emergencies or upcoming purchases. You may simply be playing it safe with a portion of your portfolio -- or waiting for a market opportunity.

If so, try a short-term taxable or tax-free bond fund. They have one important difference from money funds: Your principal will fluctuate as bond prices rise and fall. (Bond prices fall when yields rise and vice versa.)

As the Fed hiked rates in 2005, for instance, the average taxable fund ended the year with a mere 1.6 percent return. But short-term funds can quickly reinvest at higher yields as their existing bonds come due.

Plus, because they hold bonds with longer maturities, bond funds are better equipped than money-market funds to take advantage of a likely upswing in the yield curve -- and long-term rates will not lie dormant forever.

"Our guess is that long-term rates will begin to drift up later this year, albeit modestly," says Carl Tannenbaum, vice president of the National Association for Business Economics and chief economist of LaSalle Bank in Chicago.

No sweat. With a short-term bond fund, you'll be positioned to make the most of any change.

There's one final option if you want to maintain some nearly risk-free savings in a retirement portfolio: stable-value funds, which are a hybrid of bond funds and money-market funds that also "insure" your principal from bond price fluctuations.

The catch: The only way to invest in stable-value funds is through an employer-sponsored retirement plan. If that rules you out, no matter: These days there's a risk-free option for everyone.

Things NOT to do with your cash

Not all investments marketed as safe havens are appropriate places to stash short-term savings. Here are three you should pass up.

Treasury Inflation-Protected Securities Funds

With so-called TIPS funds, your principal is indexed to inflation. And in exchange for that guarantee, you accept lower returns than with bond funds. But TIPS are still a smart move over time because bond returns don't always keep up with the cost of living.

In the short term, however, you may be giving up too much yield to guard against inflation. Why? Because with today's flat yield curve, there's a good chance long-term rates will climb more quickly than inflation, says Morningstar analyst Eric Jacobson.

This type of savings bond now pays 6.73 percent. Tempting -- but don't rush to buy. The interest rate is made up of two parts: a fixed rate, currently at 1 percent, and a variable rate, which is tied to inflation data that come out twice a year. That 1 percent fixed portion, however, is too small a defense if inflation falls from one period to the next -- which is happening now.

With energy prices down since 2005, I bonds will likely pay less than 2 percent when rates reset in May, says bond consultant Dan Pederson. Another negative: You must hold on to I bonds for a full year and you pay a penalty if you bail out before five years.

EE Bonds

The savings bonds traditionally given as gifts, so-called Series EE bonds, are not worth the wrapping paper any more.

EEs purchased starting May 2005 carry a fixed rate for a 20-year term that's set at purchase (older EEs still have a variable rate). Currently you get just 3.2 percent.

The Treasury promises that your bond's value will double by the time it matures -- which boosts the yield to a 3.5 percent annual rate -- but the adjustment is made at the end of the bond's term. Cash out while you're still young, and you're subject to the same restrictions as with I bonds.